Advice to CEOs from Other CEOs

Tag Archives: Costs

Situation: A small company has a parts supplier for product that they sell to their most important customer. That customer’s specs are “copy exact” on components for existing products; also, their new products are usually based on existing components. The supplier significantly raised prices on the parts supplied to the company. How you respond to a price increase from a supplier?

Advice from the CEOs:

This is an extremely sensitive situation. One solution is to not to rock the boat. The reality is that the company needs the parts, and it will take a lot of effort to replace them with parts from an alternate vendor. Just continue the relationship. Quit worrying about it and milk it for as long as it lasts.

Find out what caused the supplier to raise prices. The supplier needs to understand that to preserve the company’s margins they may have to raise prices to the final customer. This may threaten both the company’s and the supplier’s business with the customer.

Make sure that the supplier understands the company’s costs: office, salaries, equipment, maintenance, and local regulations that are unfriendly to business and difficult to deal with. Ask them to reconsider or reduce the price increase.

Assure that the supplier understands the value that the company provides and the importance of this collaboration to the business and profits and bottom lines of both companies. Leverage this value to get the price that the company needs.

Renegotiate the relationship to assure that supplier can’t go around go around the company and sell directly to the final customer.

A CEO is concerned about a possible downturn in the company’s market. They have survived the Great Recession and want to assure that they continue to survive future downturns. How do you succeed in turbulent markets?

Advice from the CEOs:

In turbulent markets, companies do everything that they can to reduce costs. This includes just-in-time ordering – regardless of lead times which they view as the supplier’s problem, delaying orders until they have confidence that they can sell what they order and produce, being miserly with cash, and demanding lower prices – even if supplier costs are rising. Dealing with each of these requires a steady head and creative solutions.

Spend as much time as possible meeting with important vendors and clients. Maintain the dialogue. They need you as much as you need them – without your products and services, their business is compromised, too. Spend time finding and cultivating the right relationships in client companies. Most of the time, this will NOT be the purchasing departments, but higher ups within the business units who are being pressed by their superiors to generate sales and revenue.

Pushing harder does not work in turbulent markets. Too many others are doing this.

Change your message – what used to work does not work now. Adjust your message to the times and adapt your message to your customer’s needs.

People want choice, and to do business with those whom they can trust to deliver.

Develop good case studies and testimonials – stories that your customer can share with others in their company.

Situation: A company is investigating off-shoring to lower costs. Trends are confusing with some companies returning operations to local production and others continuing to offshore. In addition, options include partnering with an existing company with expertise, or developing off-shore resources themselves. Does it still make sense to off-shore?

Advice from the CEOs:

Instead of looking at broad trends, narrow your focus to what other companies in your industry or closely related industries are doing. You can get this from industry publications and trade associations, as well as from other companies with whom you have personal relationships. This will help to clarify trends that potentially impact you.

Consider whether there are complimentary objectives that will influence your decision. For example, do you want to expand your market presence abroad and would off-shoring operations help you accomplish this?

Look at other US locations – for example the Midwest. Midwestern moms working from home provide high quality customer service for Southwest Airlines. Part- or flex-timers may be less expensive than full-timers.

Make this move in steps. Consider breaking up your needs into distinct components and outsourcing each component from a different provider or vendor. This will help to preserve your “secret sauce” and corporate IP resources from those who might want to steal it if they saw the whole picture.

Good off-shore functions utilize as little management as possible. Distinct tasks are easier to off-shore than complex processes.

Look at scalability issues – based on your own past experience.

Tie the resources that you need to what is readily available in different geographies.

Situation: While funding from banks and institutional sources has been challenging in recent years, growing companies need to fund their growth. How have you funded your company’s growth?

Advice from Hannah Kain:

We focus on frugality and prevent wWhile funding from banks and institutional sources has been challenging in recent years, growing companies need to fund their growth. How have you funded your company’s growthasteful spending. However we invest in tools that enable staff to purchase wisely and stay ahead of customer demands. We also collaborate with vendors to manage costs.

As a result, the last two years have not forced us to change how we fund growth. We are getting large contracts and work globally to solve customers’ logistics challenges. Our challenge has been moving from centralized distribution to strategically placed centers around the globe, increasing inventory costs and cash needs.

Where we have changed is in how we negotiate terms and credit with our customers. We manage vendor accounts payable to maximize cash flow while treating them as business partners. This requires close vendor communications to assure that everyone’s needs are met.

We have been cautious with our banks and seldom dip into credit lines. Managing vendor payments has been more effective.

Essential to vendor communications are open sharing of information and goal setting. We work to create a team atmosphere. This is similar to what we do in our offices. In our experience, instilling the right culture is far more powerful than financial incentives.

We share information through all-hands company meetings and regular updates so that everyone gets the full picture.

We also share information with our vendors so that each side is aware of the other’s needs.

We create an annual one-page business plan for the company, and parallel plans down to the supervisor level. Performance against plans is updated regularly to assure that we remain on top of situations.

We focus training on new tools. Our staff gets technology they need to be successful.

We generously provide technology to our employees, provided that they give a logical business rationale. This includes home computers, iPhones or Applets to help them do their jobs.

Similarly, when a vendor or customer asks for a service improvement or a new service with a good business rationale, we invest to support this.

These methods have allowed us to finance most of our growth internally.

Don’t assume that there is such a thing as a “fair price” or “fair margin.” The price is whatever the customer is willing to pay for your offering. The price increases the more unique it is, and the more critical to the customer’s needs.

Do NOT share your cost and margin information – as company policy.

Consider combinations of pricing, terms and delivery that keep you whole while offering the customer different price points.